Long-term UK borrowing costs have climbed to their highest level since 1998, as the conflict involving Iran drives up energy prices and investors grow nervous ahead of elections.
Government bond markets across major economies have weakened since the US-Israeli conflict with Iran began. That has pushed up the effective cost of Government borrowing.
In the UK, pressure has been sharper than in other G7 countries. Traders point to concerns that Britain remains more exposed to inflation, as well as to uncertainty ahead of Thursday’s local elections and upcoming national contests in Scotland and Wales.
The closure of the Strait of Hormuz has disrupted global oil and liquefied natural gas supplies, sending energy prices higher. Bond markets have responded by pricing in stronger inflation and higher borrowing costs, especially after expectations grew that the blockage could last longer than first thought.
On Tuesday, the yield on 30-year UK Government bonds reached about 5.78%, a 28-year high. The 10-year gilt yield rose to around 5.1%, its highest level in 18 years.
Higher gilt yields matter because they increase the Government’s debt interest costs. That adds pressure on Chancellor Rachel Reeves as she tries to meet her fiscal rules, including avoiding borrowing for day-to-day spending and getting debt falling as a share of national income.
UK borrowing fell to £132bn in the year to March, its lowest level for three years, but analysts expect pressure to build if inflation rises again.
The Bank of England has played down immediate concerns, but markets remain focused on energy prices, political uncertainty and the direction of UK debt.
Talk to us about your business.
